Analysis Of RMB Exchange Rate Mechanism Reform Effects On Chinese Economy

With the launch of RMB exchange rate forming mechanism reform since July, 2005, the activity of RMB exchange rate changes dramatically, which impacts growth path of Chinese macro-economy and activities of micro-economy agents greatly. The potential impacts of RMB exchange rate regime reform on Chinese growth trend and growth style emerge gradually. And the changing circumstances of Chinese macro-economy also affect the proceedings of exchange rate reform. For Chinese economy under the background of global integration, Analyzing the driving factors of the reform and evaluating the impacts on Chinese economic growth of new regime might be contribute a lot to the theoretical study and practical operation relating to RMB exchange rate issue. From the viewpoint of open macro-economy, this essay studies the impacts on Chinese economy of the reform and provides empirical results for the further reform, with the econometric tools of co-integration, error-correction and structural vector-autoregressive model, etc.Entering the 21st century, China witness high-speed growth, with worsen situation of internal and external disequilibrium of Chinese macro-economy. On one hand, Chinese current account and capital account show double-surplus consistently, which amass huge amount foreign exchange rate reserves. On the other hand, the production power is excess and the internal demand is insufficient. Under this background, Chinese government launches exchange rate mechanism reform, aiming at using exchange rate to realize the internal and external equilibrium with other macro-control tools. The first chapter introduces the background, the effects of RMB exchange rate reform and the new issues resulting from the reform, illustrating the significance of this study and constructing the research framework. Furthermore, this chapter conducts a synthetic survey on the topic of exchange rate activity and regime affecting economic growth, sums up the evaluations on the exchange rate regime economic performance in terms of gross production, trade, investment, price level and response to external shocks, which forms the base for further research.The historical development path of world exchange rate system shows there does not exist any exchange rate regime suitable to all the nations and exchange rate regime is somewhat endogenous. The economic performance of fixed exchange rate regime, flexible exchange rate regime and immediate exchange rate regime show great disparities, according to different political institutions, economical institutions and development stages. The second chapter mainly introduces the theoretical opinions relating to exchange rate activities and regimes impact on growth. For the purpose of evaluating different exchange rate regimes, the second chapter introduces exchange rate regime classification methods and exchange rate regime choice theories. Moreover, this chapter reviews historical path of RMB exchange rate reform since the set-up of PRC, and appraises its performance briefly. During the era of planned economy, RMB exchange rate is just a tool of transaction, without the function of manipulating the internal and external equilibrium. After the reform and open-up, the market-oriented degree of RMB exchange rate is gradually increasing. RMB exchange rate impels trade and investment, with limited function of manipulating macro-economy. This chapter emphasizes that exchange rate mechanism should be proceeded in an active, controllable and gradual way by Chinese government.After the carrying out of more flexible RMB exchange rate mechanism, RMB exchange rate shows strong appreciation trend. So it is of importance to measure the RMB exchange rate equilibrium level and to find out the long-term underlying factors and short-term disturbances driving the appreciation of RMB exchange rate. Equilibrium exchange rate is the exchange rate achieving internal and external equilibrium simultaneously, which could be measured by purchasing power parity (PPP) model, fundamental equilibrium exchange rate (FEER) model, behavioral equilibrium exchange rate (BEER) model, etc. The theoretical base of BEER model is to examine whether exchange rate has long-run co-integration relationship with national macroeconomic fundamentals. And under the background of mass global capital flow, it is important to analyze the impact of international financial market equilibrium on equilibrium exchange rate of one country. The third chapter measures the equilibrium level and misalignment degree with the co-integration and error-correcting model on the base of the BEER model. The results show that RMB exchange rate does not deviate from its equilibrium level obviously, and most of current appreciation pressure comes from international short-term hedging capital flow. This chapter suggests the monetary authorities should strength govern of capital flow and be cautious about the appreciation of RMB and the open of capital account.Since the 21st century, the growth style relying on investment and export changes to some degree, but export is still a key factor to maintain the stability of Chinese business cycle. Referring to historical trade theories, newly set-up trade gravity model and international business cycle theory, it could be known that the potential decision factors of national trade volume includes inner and external factors. The inner factors consist of geographical factors, endowment and industry structure, etc. And external factors consist of world economic developing trend, international division, etc. After surveying the status quo and main characteristics of Chinese export and import, the forth chapter deals with the causes of fast growing trade surplus from the angle of trade style and trade structure. The forth chapter selects economic indicators affecting the export of China based on the stylized facts, and constructs Chinese export climate index with the Principal Component Analysis. The results indicate that exchange rate is one of factors affecting Chinese export, and the fluctuation of Chinese export cycle is driving by internal factors of industrial policy and investment, along with the external global economic factors. For avoiding the excessive fluctuation of export cycle, the government should take the measures of industrial, public and monetary policy to improve trade structure, to lessen the ratio of processing trade and to urge the diversification of trade partners.The enlargement of RMB exchange rate volatility increases the risk of Chinese traders. Considering the financial exchange rate hedge tools are not used widespread by the traders, it is necessary to examine the effects of RMB exchange rate risk on Chinese trade volume. From the view point of partial equilibrium and general equilibrium, the scholars do not get the consistent theoretical and empirical results about the relationship between exchange rate and trade volume. The relationship relates to some factors, such as traders'market status, risk-averse degree, access to hedge tools, etc. The fifth chapter analyzes the effects of RMB exchange rate level and volatility on the import and export of China. This chapter firstly measures the RMB exchanger rate volatility based on the equilibrium exchange rate theory and generalized autoregressive conditional heteroskedasticity model. Then, this chapter examines the effects of RMB exchange rate volatility on Chinese export and import by setting up the export and import error-correction model. The results show that RMB exchange rate volatility exerts different impacts on Chinese export and import. In the long run, RMB exchange rate volatility has positive impacts on import, but has negative impacts on export. In the short run, RMB exchange rate volatility impacts export and import negatively. So the Chinese authorities should focus on the level and volatility of RMB exchange rate. This chapter suggests that exchange rate policy cannot solely solve the underlying issue of trade sector, great impacts on Chinese export and import, Chinese authorities should adjust trade surplus by combining the measures of exchange rate policy, interest rate policy, government finance and tax policy.Along with the open-up and reform, external shock impacts Chinese economy more and more. It turns out to be a hot issue whether to absorb the external shock by enlarging the flexibility of exchange rate. The exchange rate could be a shock-absorber if the cause of exchange rate fluctuation is mainly real shocks. However, the exchange rate could not be a shock-absorber, but induce the disturbance of international financial market into the economic systems if the cause of exchange rate fluctuation is mainly nominal shocks. The sixth chapter studies the mechanism of RMB exchange rate absorbing external shocks with the 3-dimentional and 4-dimentional vector autoregressive model under the framework of Mundell-Fleming-Dornbusch model. The 3-dimentional VAR consists of Sino-Us relative GDP, exchange rate and relative price level. And the 4-dimentional VAR consists of Sino-Us relative GDP, exchange rate, relative price level and relative monetary policy variables. The VAR models are identified by the method of structural VAR. The result shows that real shocks explain main part of real RMB exchange rate against dollar. is con The results show that real shock explains most part of real RMB exchange rate against dollar, which means the enlarging of RMB exchange rate volatility could absorb external shocks. But the result also indicates the disturbance of international financial markets impacts Chinese economy more and more through the channel of exchange rate, and the volatility of exchange rate would be one of resources of instabilities.